Channels, Spring 2018

Page 30 Schwartz • Public Principles and Economic Legacy was cited in Public Principles of Public Debt . In this work, however, Buchanan relies on Bastable to elaborate the basic Smithian principle that expenditure and revenue should be analytically tied to prevent public profligacy. 90 While he still noted that debt shifts financial burden to future taxpayers, Buchanan also argued that deficit finance is unwise because it violates a fundamental decision rule: simultaneously presenting costs and benefits to the decision-maker. 91 The technical arguments of Buchanan’s earlier debate positions have been enriched by his integration of public choice to better understand and lay out the incentives facing voters and politicians in a democratic society. When he moves to an explicit consideration of the issues of public debt, Buchanan begins his argument by summarizing and citing his arguments from Public Principles of Public Debt, which he continued to integrate throughout the rest of the book. 92 Nevertheless, his original argument, that the analogy between public and private debt is fundamentally sound, significantly expands in Democracy in Deficit with a basic point: “A decision to ‘purchase’ these benefits [of government expenditure through debt finance] is presumably made through the political rules and institutions in being.” 93 While this may appear simple in light of later public choice developments, it shifts the mode of analysis from the technical economics of debt to the different mechanics of the polity facing the present voting citizen who gains from debt finance. This demonstrates a clear contrast between public and private debt, which Buchanan unfolds as follows: If an individual borrows, he incurs a personal liability. The creditor holds a claim…and the borrower cannot readily shift his liability to others…Compare this with the situation of an individual who is a citizen in a political community whose governmental units borrow to finance current outlay. At the time of the borrowing decision, the individual is not assigned a specific and determinate share of the fiscal liability that the public debt represents. He may, of course, sense that some such liability exists for the whole community, but there is no identifiable claim created against his privately owned assets. … Because of this difference in the specification and identification of liability in private and public debt, we should predict that persons will be somewhat less prudent in issuing the latter than the former. 94 This comparison of public and private decision incentives is only the first of many key insights in public finance which Buchanan developed through public choice analysis. He calls another the “allocative bias.” 95 This is basically the argument that “taxation and debt 90 James Buchanan and Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes , (Liberty Fund, Inc., Indianapolis: IN, 2000), 11-12. 91 Ibid, 12. 92 Ibid, 16. 93 Ibid, 17-18. 94 Ibid, 19. 95 Ibid, 101.